Carbon Pricing in Indonesia: Current Status and Future Outlook

Carbon trading is a market-based method that aims to control and reduce greenhouse gas (GHG) emissions to reduce the impact of climate change and support environmental sustainability. This mechanism places an economic value on carbon, allowing it to be traded by individuals, companies and countries. Carbon trading centers on the transaction of rights to emit greenhouse gases, where a central authority sets a limit on the amount of emissions allowed. These emission quotas are distributed or traded to companies in the form of emission permits, which can be traded according to their individual emissions management needs and strategies. Overall, carbon trading is a potential solution to balance economic growth with climate change mitigation efforts. However, the success of this mechanism requires more comprehensive policies, more established markets, and more sophisticated technological support. In addition to economic and environmental aspects, the success of carbon trading also depends on the intensification of international cooperation to face global challenges related to climate change.

Carbon pricing has a significant impact on various industries, especially those that are high carbon-based. In the energy, manufacturing and transportation sectors, operating costs increase due to carbon taxes or the need to purchase emission permits. This puts pressure on profit margins, pushing companies to look for more efficient ways to produce and manage emissions. However, these challenges also create opportunities for innovation, for example by developing low-carbon technologies, improving energy efficiency and utilizing renewable energy sources. Companies that are able to adapt to these policies not only reduce their financial risks, but also strengthen their competitiveness in the global market. The carbon pricing policy incentivizes the industrial sector to accelerate the transition to greener business practices, which is now an added value in building reputation and consumer loyalty. These adaptations, while initially requiring significant investment, can yield long-term benefits in terms of efficiency, technological innovation and operational sustainability.

Climate mitigation actions form the basis for the implementation of the carbon pricing mechanism, which covers various sectors and sub-sectors such as energy, waste, Industrial Process and Product Use (IPPU), agriculture, forestry, as well as other sectors that evolve with technological advances, such as transportation, power generation, and industry. These sector and sub-sector designations are aligned with Indonesia's sectoral ministries, with Presidential Regulations clearly specifying the ministries responsible for coordinating these sectors. In an effort to reduce CO2 emissions, voluntary collaboration between countries can be realized through market and non-market mechanisms, where developed countries provide funding to support developing countries in implementing mitigation measures. One form of this cooperation is through the Carbon Trading mechanism, which has the potential to support environmental sustainability and economic growth simultaneously. Here are some of the main potentials that can be developed:

1. Investment in Green Projects: Carbon trading can attract investment in green projects such as forest restoration, renewable energy, and carbon capture technologies.

2. Integrated Carbon Markets: A more integrated carbon trading system between countries can increase efficiency, such as the European Union Emissions Trading Scheme (EU ETS).

3. Monitoring Technologies: The adoption of technologies such as satellite monitoring and blockchain can improve emissions reporting accuracy and carbon trading transparency.

4. Sector Diversification: Carbon trading can be expanded to other sectors such as sustainable agriculture, waste management and blue economy.

5. Incentives for Innovation: Carbon trading encourages companies to create energy efficiency technologies and electric vehicles.

6. Increased Public Awareness: Carbon trading can raise public awareness about the importance of reducing emissions and engage them in environmental action.

7. International Cooperation: Carbon trading strengthens global commitment to tackle climate change with financial support and technology transfer.

8. High Economic Value: Growing demand for carbon credits provides economic opportunities for countries with high carbon potential, such as Indonesia.

Indonesia has further strengthened its commitment to climate change mitigation by issuing Presidential Regulation No. 98 of 2021 on the Implementation of Carbon Economic Value. This regulation supports the achievement of the Nationally Determined Contribution (NDC) target agreed with the UNFCCC, in which Indonesia targets to reduce greenhouse gas (GHG) emissions by 29% independently and 41% with international support. On September 23, 2022, Indonesia increased its ambition through the Enhanced NDC document with an emission reduction target of 31.89% independently and 43.20% with international support. As part of this effort, Indonesia also enacted a carbon tax imposed on individuals or entities that purchase carbon-containing products or conduct activities that generate carbon emissions. Article 13 paragraphs (8) and (9) of the Harmonization of Taxation Regulations Law (HPP Law) stipulates that the carbon tax rate must be at least equal to or higher than the market price of carbon per kilogram of carbon dioxide equivalent (CO2e). If the market price of carbon is below IDR 30 per kilogram of CO2e, the tax rate is applied at that minimum level or in other equivalent units.

Carbon pricing in Indonesia has significant impacts, both positive and negative. On the positive side, it promotes the reduction of greenhouse gas (GHG) emissions by incentivizing companies to adopt low-carbon technologies and improve energy efficiency, and contributes to achieving the net-zero emissions target by 2060 or sooner. In addition, carbon tax and carbon trading proceeds are potential new sources of revenue for the government, which can be used to fund climate change mitigation and adaptation projects. The policy also accelerates the energy transition by encouraging the adoption of renewable energy such as solar, wind and hydro, replacing fossil fuels, and enhancing Indonesia's international reputation as a climate leader in the region. On the other hand, there are challenges to be faced. High-emitting sectors, such as power generation, manufacturing and transportation, could face increased operational costs that could potentially reduce their competitiveness. Moreover, these additional costs could be passed on to consumers in the form of higher prices for goods and services. Implementation of this policy may also be constrained by the lack of adequate emissions monitoring infrastructure and limited institutional capacity. Last but not least, some industry players may resist this policy, considering it an additional burden with no immediate benefits in the short term.

Carbon accounting tools and platforms play an important role in greenhouse gas (GHG) emissions reduction efforts. These technologies enable companies, industries and individuals to effectively measure, track and manage their carbon footprint. With accurate information on their emissions, they can take steps to reduce their environmental impact and meet sustainability targets. The following are some common types of tools used in carbon accounting.

• Carbon Footprint Calculators: Online platforms that allow users to calculate their carbon footprint based on activities such as travel and energy consumption.

• Carbon Accounting Software for Business: Tools for companies to calculate emissions from their operations, such as SimaPro and GaBi, for emissions analysis and reporting.

• Emissions Reporting Platform (CDP): Enables companies to report carbon footprints to international standards and attract sustainable investments.

• Emissions Monitoring System: Uses sensors to measure CO2 emissions in real-time, ensuring conformity with emission reports.

• Blockchain for Carbon Credits: Enables transparent and secure recording of carbon credit transactions.

• Environmental Risk Assessment Tool: Helps companies assess the impact of their activities on climate change, as well as risks in supply chains and operations.

Rapid progress in carbon pricing in Indonesia has reached an important milestone. Presidential Regulation (Perpres) No. 98 of 2021 on the Implementation of Carbon Economic Value (NEK) is an important foundation for Indonesia in implementing carbon trading as part of climate change control efforts. This regulation regulates carbon trading mechanisms, including cap and trade, carbon offsets, and other market-based instruments, to encourage the reduction of greenhouse gas emissions in the energy, industry, forestry, and waste sectors. Through this arrangement, companies that exceed emission limits can purchase carbon certificates from other parties that successfully reduce emissions below the specified limit. In addition to encouraging innovation and efficiency, this policy also contributes to the government's 2060 Net Zero Emission (NZE) target, while strengthening Indonesia's position in the global carbon market. The Perpres reflects Indonesia's commitment to integrating economic sustainability with climate action. The key articles of the regulation are as follows.

1. Article 6: the implementation of mitigation includes Ministries/Institutions, local governments, business entities, and communities.

2. Article 48: transfer of carbon rights status is carried out through the SRN PPI registration mechanism.

3. Article 53: compensation can only be implemented after the business entity has fulfilled its mitigation obligations.

4. Article 73: GHG emission reduction certificates are prohibited from being used in contracts that transfer rights in international trade without ministerial authorization.

5. Article 69: every business entity is required to record and report the implementation of mitigation actions, adaptation actions, and NZE (Net Zero Emissions) activities as part of achieving the NDC.

6. Article 49: international carbon trading does not reduce the achievement of the NDC target in 2030

7. Article 54: carbon trading (domestic and international) shall be conducted through carbon trading mechanism through carbon exchange and/or direct trading.

8. Article 77: the management of international carbon trading cooperation is regulated by Ministerial regulation.

Strong international cooperation allows developed countries to support developing countries in reducing emissions through funding and technology transfer. Countries such as Japan and Canada have integrated carbon markets with renewable energy policies, accelerating the adoption of clean technologies and reducing dependence on fossil fuels. Technological advances such as satellite monitoring and blockchain are also improving the transparency and efficiency of the global carbon market, reducing the potential for manipulation and building trust in the carbon trading mechanism. In this context, the international carbon market can be expanded to deliver greater impact in mitigating global climate change.

Carbon credits in Indonesia have functions to improve transparency & integrity, promote a strong carbon credit position (to promote domestic buyers, not greenwashing activities), more methodologies (including transition credits), campaign for domestic market, tax certainty (VAT, tax deductible), SDGs/certification & additional ratings. There are international alliances related to the carbon market in Indonesia such as UNFCCC (United Nations Framework Convention on Climate Change) is an international agreement that aims to stabilize the concentration of greenhouse gases (GHG) in the atmosphere. As for the international market, KORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) aims to reduce the impact of carbon emissions from the international aviation sector. KORSIA is an important part of climate change mitigation efforts in the aviation industry, which is one of the fastest growing sectors in terms of greenhouse gas emissions. Then for movement there is the CCP. The CCP (Liquid Carbon Program) aims to ensure any carbon reduction or carbon offset project follows credible international standards, to maintain environmental integrity and support methodological alignment. In this context, CCP is used to facilitate the mitigation of carbon emissions through the application of methodologies that are measurable, verifiable and aligned with global efforts such as the Paris Agreement and schemes such as KORSIA (Carbon Offsetting and Reduction Scheme for International Aviation).

Indonesia Carbon Exchange (IDXCarbon)

The Indonesia Carbon Exchange (IDXCarbon) is starting to show trading activity. During the first eleven months, three SPE-GRK projects have been listed on IDXCarbon. The three projects are Lahendong Unit 5 & 6 PT Pertamina Geothermal Energy Tbk which became a pioneer project listed on September 26, 2023. Then on October 23, 2023, the second project, namely the Construction of a New Natural Gas-Fired Power Plant PLTGU Block 3 PJB Muara Karang, was listed. Then, the Operation of Gunung Wugul Minihydro Power Plant (PLTM) listed its project on IDXCarbon on July 8, 2024. During 204 trading days, the total trading value on IDXCarbon was recorded at IDR37.03 billion with a total trading volume of 613,541 tCo2e. Last Price (IDTBS) IDR58,800, with the number of Service Users as many as 71. The total carbon credit of PLTGU Muara Karang was the most recorded in this period, which was 900,000 tonsCO2e. While the GHG SPE for PT Pertamina Geothermal Energy Tbk's Geothermal project in Lahendong recorded 864,209 tonsCO2e and Gunung Wugul Geothermal Power Plant recorded 12,932 tonsCO2e of carbon units.